The Obama administration took on the powerful farming interests in America's heartland today, making clear it does not see corn-based ethanol as part of the long-term solution to climate change.

The new proposals on the biofuel – in the face of intense pressure from agricultural companies and members of Congress from corn-growing states – were seen as the first test of Barack Obama's promise to put science above politics in deciding America's energy future.

Ethanol had once appeared to provide a transport fuel which did not increase carbon dioxide. But studies have suggested that the fuel needed to process the corn meant the ethanol could be more polluting than the fossil fuel it was meant to replace. Furthermore, the use of food crops for biofuel was blamed for a substantial part of the large price rises seen in 2008.

Administration officials set out a $1.8bn (£1.19bn) plan to develop a new generation of more environmentally-friendly biofuels that are not made from food crops and have a lower carbon footprint, while also providing an immediate bail-out of existing corn ethanol producers, which are suffering in the global economic crisis: falling petrol prices have undercut demand for ethanol at the pump.

Lisa Jackson, head of the Environmental Protection Agency, made clear she does not see corn-based ethanol as a permanent part of America's clean energy mix. "Corn-based ethanol is a bridge... to the next generation of fuels ," she said.

The EPA proposed a new standard for advanced biofuels, ensuring they are at least 50% cleaner than petrol. Jackson said existing bio-ethanol resulted in a 16% reduction in greenhouse gas emissions.

The agency said it would also take into account the environmental impact of turning land over to biofuel crops, a key demand of the industry's critics.

Environmentalists saw the move as an early indication that the Obama administration would stand its ground against powerful industrial interests.

"For an administration that has already staked so much on restoring science to the process of governing, this was a really critical test," said Nathanael Greene, a renewable energy expert at the National Resources Defence Council. "This was the first big industry where we are starting to see some of the potential changes required by climate policy and the administration is ready to stick to the science and not get rolled by industry."

The country's fuel producers gave a cautious welcome to the announcement, but added that they would continue to challenge the EPA's criteria for measuring the environmental cost of fuel crops.

The impact on the ethanol industry of the agency's proposal, which now undergoes public review, was softened by Obama's decision to put the agriculture secretary, Tom Vilsack, who is from the corn growing state of Iowa, in charge of a new task force that will oversee biofuel development. The officials also said there would be considerable sums available to farmers to make the transition from using corn to make biofuels to using pulp and agricultural waste.

The programme envisages $1.1bn to help ethanol producers market the fuel, and to convert their processing plants from fossil fuels to renewable energy. "There is over $1.1 billion of opportunity here," Vilsack said.

Energy secretary Steven Chu said there would be an additional $786m towards the development of new biofuel refineries and the design of flex-fuel cars.

The administration's move on ethanol comes nearly two years after Congress ordered fuel refineries to increase their use of ethanol, and by 2022 to step up the share of advanced biofuels in the country's fuel mix.

The law ordered all ethanol produced after 2007 to meet a standard 20% reduction in greenhouse gas emissions, and for advanced biofuels to meet a 50% reduction target.

Existing ethanol producers will be exempt from those targets, but new plant will be required to make the grade. That represents a big challenge for the production technology.